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Cashback Mortgages

Home ownership comes with significant upfront costs like legal fees, deposits, mortgage arrangement fees etc. Then you must factor in the other costs of moving, such as hiring removal vans, installing broadband and buying furniture.

For cash-strapped homebuyers, the incentive of a lump sum of money at the start of a mortgage term can be a very attractive prospect.

Read on to find out how Cashback Mortgages work.

What is a Cashback Mortgage?

A cashback mortgage is like any other mortgage, only you may be offered cash as a percentage of every £100,000 you draw down. Typically, this could be around 2% (so, £2,000 cash), or a set figure (say, £500). The funds will be transferred over, once you have completed your home purchase.   

But please note, the lender reserves the right to claw back some or all of the cash offered, if you choose to redeem your mortgage before the agreed term ends.

How is a Cashback Mortgage Repaid?

Cashback can be offered with any type of mortgage, whether it is fixed, capped or tracking the Bank of England base rate, for a certain period of time. For this reason, it is better thought of as a mortgage ‘feature’ rather than a mortgage type.

Who is Eligible for a Cashback Mortgage?

• If you are eligible to live and work in the UK and you pass the lender’s affordability checks, you may be offered a cashback mortgage.
• These are great for first-time buyers and existing homeowners alike. Some lenders may exclude first-time home buyers from applying or existing homeowners. The conditions of the cashback offer all depend on the lender’s preferences.

What are the Advantages of a Cashback Mortgage?

Cashback mortgages are becoming widely available, as the money offered to home buyers at this most crucial time can make the process of buying a home a lot more affordable.

Let’s Look at a Cashback Mortgage Example:

Glen and Bella are buying their first home. They have been saving diligently for two years and even moved into Glen’s parents’ house, to lower their living costs as much as possible.

In this time, they were able to raise a 10% deposit on a home, which was pretty tough going for both of them. They have very little to furnish their new home with and are worried about covering the moving costs with what little money they have.

Glen spotted a mortgage which offered £1000 cash back for first-time buyers and a rate of 5%. For those with 15% deposit, the interest rate goes down to 4%, with cashback of £1000. Glen and Bella consider holding off on the deal until they reach 15% deposit saved. Glen’s parents, on the other hand, want to sell their house and downsize. The couple doesn’t have the luxury of time to wait and save. Bella compared some fixed-rate deals with no cashback incentive and found that although her monthly payments would be lower, the arrangements fees were prohibitively more expensive. Glen and Bella took the 90% LTV cashback mortgage with £1000 cashback.

What are the Pitfalls of Cashback Mortgages?

• Limited Time Offers - Cashback offers are for a limited time only, which means you may need to be on the lookout for a great cashback deal and be ready to apply before the offer expires.
• You Pay it Back - Be wary that cashback doesn’t mean ‘free cash,’ you will most likely pay all of it back in your interest payments. It is worth doing the long-term sums, to establish whether the cashback incentive makes for a more expensive mortgage overall.
• Higher Interest - Borrowers looking at cashback mortgages should look carefully at the interest rate charged in these types of mortgages. It is possible that a better deal can be found elsewhere.
• Early Redemption Penalties/Charges (ERC’s)- These are a common feature of these mortgages, with the cost of leaving this kind of arrangement early, possibly going well into the thousands.  

What are the Alternatives to a Cashback Mortgage?

• Discounted Mortgage – These offer a discount on interest rates at the beginning of your mortgage term and may appeal to homebuyers who would like to save some money wherever possible in the mortgage application process.
• Higher LTV Loan – If you have a 20% deposit, but you need some money to help you move, taking out a higher loan to value mortgage can free some of those funds. However, the interest rate on a larger LTV loan may be higher than the rates offered to those with more deposit to put upfront.
• Unsecured Loans – These may give you access to cash for a home move, however, the interest rate may be a lot higher than your standard mortgage rate.

An independent financial advisor can help you find the right mortgage deal for you. Whether you’re looking for a great deal on interest rates or a cash lump sum to help you move, get in touch with a broker and discuss your options now.